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World and Asian Markets finished strong in December: the Hang Seng Index +11.0% for the Year, the MSCI Asia ex Japan Index +16.3% the MSCI AC ASEAN Index +5.8%, Thai SET Index +9.7%, FTSE Vietnam +5.9%, Knight Mekong Strategy Fund +12.2%, and the Knight Asia Contrarian Fund +1.1%.

The Year of the Pig was a tumultuous year for Hong Kong (I don’t remember any of the soothsayers in 2018 predicting this !), with many months of continuous pro-autonomy demonstrations. In November, the Hong Kong people sent a powerful message in their local government elections through both a very high 70% voter turnout and also the pro-democracy camp winning 388 out of a possible 452 seats in local councils. The January 2020 appointment of Mr Luo Huining as new Head of the Hong Kong / China Liaison office is being seen by some as the precursor to Beijing taking a harder line, but by others as a positive move since he is less aligned with Hong Kong’s business elites than his predecessor and could offer fresh approaches to addressing Hong Kong’s current challenges.

Emerging Asia stocks, including Hong Kong & Thailand offer reasonably good value, trading all of last year within a 15% range as they were dependent on perception of an always imminent US/China trade deal. In Hong Kong, the property market has already fallen considerably with a bottom possibly reached in October 2019 and private consumption is already well discounted. Global trade tensions remain a very dark cloud on the horizon, and whilst we still believe that President Trump wants to conclude a “trade deal” as soon as possible, the specifics of any final deal may in the end be watered down in the interests of getting a deal done. Anything that de-escalates trade tensions is considered positive for both the Asian economies and markets. Trump may focus on his country’s trade deficits with Europe this year giving Asia some breathing space.

However, the prospect of future trade disputes will now remain a constant concern for businesses dealing in Asia. Thailand, Vietnam, Cambodia & Myanmar will continue to benefit from manufacturing FDI seeking to diversify away from China to hedge their risk. Chinese companies seem to favour Thailand, whilst Japanese, Korean & Taiwanese industrialists, already well represented in Thailand, are expanding  into Vietnam. During 2019, Vietnam far surpassed Thailand in terms of FDI (9M19 $11.2B vs $7.8), but we expect Chinese FDI into Thailand to crystallize in 2020 giving a boost to the lackluster GDP growth. China will continue to expand its influence in Asia, pushing forward its “One Belt & One Road” theme and ongoing sponsorship of Cambodia & Myanmar. President Xi Jinping’s upcoming visit to Myanmar on 17th January 2020 ahead of this year’s election will focus on the Mandalay-Kyaukpyu corridor, but may also encompass closer alignment between the CNY and Kyat.

Long delayed Thai infrastructure projects may also come to fruition this year together with other stimulus measures that may support the overly depressed banking, construction and property sectors. Politically, the threatened dissolution of the Future Forward Party may herald the return of street protests in Thailand although Thai markets have tended to ignore previous cycles (Yellow in 2008 & 2014, and Red in 2010). This will put ever more pressure on the government to perform economically.

As we enter 2020, Middle East tensions are stealing the limelight from the “Trade War” after the recent assassination of the Iranian Quds chief. There will also be much posturing ahead of the November 2020 US elections on various fronts while across the Atlantic PM Boris Johnson will unveil some grand post-Brexit initiatives. The question is whether at some point the soaring oil price will trigger global recession fears.

Faced by likely range-bound markets, our funds positioning will remain focused on special situations and key themes/sectors including Chinese sponsored infrastructure; ASEAN agribusiness & tourism; energy independence; the recovery of the real estate sectors in Hong Kong, Singapore & Bangkok; increased Mekong integration; and industrial park developments outside of China.

Our various special situations are expected to reap substantial rewards this year. Kingsgate’s (KCN.AU) arbitration hearing with the Thai government begins on 3 February 2020 and we believe compromise negotiations will accelerate prior to this meeting. We still expect that the Thai side will offer indirect compensation for the mine suspension, rather than hard cash. This might include soft loans to restart operations, an extended mine life (currently ends in 2028), and an extended tax holiday. KCN’s market cap is already underpinned by cash from the political risk insurance payout in 1H19, and it also still retains its Chilean silver property and the Australian Challenger deep gold mine. The company has had its 50% share buyback approved by shareholders further underpinning the share price.

Meanwhile, Donaco’s boardroom battle seems to be ending. The Lim family representatives have departed and the new Hong Kong shareholder has taken control. We can’t say which side is better, but certainly a divided board was counter-productive. It is likely that the new board will re-engage with their previous Cambodian/Thai partner to settle the lease and no-compete issues. At 1/10 its previous price level the upside for Donaco’s share price is substantial.

Also in Cambodia, BRM Agro is progressing with its planned 1Q2020 listing on the Canadian Stock Exchange. BRM’s IPO proceeds will be used to triple its mill capacity to 90,000 tons per annum resulting in a forward PER of 5X. After a re-rating to 10X,  BRM plans a Thai secondary/DR listing within the following 12-18 months.

Gold Cement, based in Mandalay, is soon to increase its stake in the Sinminn cement plant from being a 49% JV to be a wholly owned 45 year leasehold. Post lease, GC has prepared plans to list in either Thailand, Singapore or the UK at a substantial premium to the current valuation.

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